Investment/Money Raised

First things first; while this site is in many ways 'all about the money', we want to be very clear on one thing, so please take it seriously.

Building a venture is very rarely, and only temporarily ever about RAISING money -- It is almost always about MAKING money and CREATINGVALUE. If your focus becomes raising money, you should start asking yourself who is building value in the company.

Now, if you've read that and are still interested in learning a little about the implications and expectations of raising money then read on...

We'll break this topic into a few parts in order to be as clear as possible.

Different sources and types of money

Timing of raising money

How much to raise

Different sources and types of money

Figuring out whom to raise money from can be an important decision for a variety of reasons. It starts by figuring out what type of money is the best suited for a specific venture at a specific stage. The following table might be of some use in thinking about this.

Source of Funding

When it's good

What to watch for

Friends & Family

This is almost always the very first money into new companies (behind self-financing)...and for good reason. Beyond the obvious reason that everyone's Mom and Dad thinks they're brilliant, if you're not comfortable risking your personal money or your families then why would a professional investor back your idea?

For small amounts of money to help get things going, this is frequently the only money available.

The obvious here... The money is almost always the least important thing at stake in this situation. Family disputes and conflicts over business ventures can be very nasty and have long-lasting implications for relationships and businesses.

We will always urge complete transparency with all investors but in this case it is just that much more important. If, in your mind, there is a 5% chance of failure with your venture, we recommend telling friends and family that there is a 90% chance of failure before allowing them to invest a penny.

Angel Investors

Angels can be great for lots of reasons. Especially the right Angels.

Frequently these guys (or gals) are previous success stories who have great networks and lots of knowledge about building a successful venture. Sometimes those networks include other funders, potential employees or service providers. The best Angels are great mentors.

Also, Angels are often more interested in the entrepreneur, or their story than seeing immediate returns. While we wouldn't recommend making that part of your pitch, it's worth thinking about...who would your story really ring true with?

Angels are usually relatively limited in their ability to provide big-money funding.

While certainly not a steadfast rule, Angels and even groups of Angels are not ideal for rounds of funding where more than a couple million dollars are needed.

Also, while the right Angels are great -- they are not all created equal. If the variability between VC's is big, the variability between Angels is ENORMOUS...know them well before taking a penny. The last thing you need is a high-maintenance Angel.

A Bank

If you can get bank financing for your startup then great! Assuming you've got everything you need with the exception of some cash, and if you can convince a bank to lend you money for your plan then go for it.

In almost all cases, this will take the form of a typical loan with publicly available "small business" rates.

If you're buying real-estate for example then this will likely be an option. Also, if you're already making money then this may be an option backed by existing sales or profits.

This will, in most cases, only be available for specific asset-backed purchases.

It will almost certainly not be available for speculative investment.

Also, if you're looking for connections or other help in building your company -- this source will be unlikely to deliver.

Grants

When you can get grants, be they government grants from the NSF, NIH, DOE or other agency -- GET THEM!

This is the cheapest money you will ever find and if you can get enough of this funding to get going you can really drive up your valuation and give up nothing other than a little time to file the applications.

These are usually only available to companies grounded in science and cutting-edge research so it won't help you out much if you're trying to start the next Facebook or Google.

Even for those science-based startups that do qualify, the check can be slow to arrive (12 months from the time of application is not unusual).

Venture Capital

If you're here, then this is probably what you're thinking about.

This money can be great if you need millions to get to market and are looking for some savvy investors who can help you navigate the path to acquisition or IPO.

This type of money is not always as helpful as it's cracked up to be. It can be, but all venture firms, and more to the point, all venture capitalists are not created equally. So, look for a good fit for you and your venture.

This type of funding very often means that you will lose control and frequently leadership of your venture. It is not at all unusual for venture firms to bring in "professional management" early on after their investment.

If you raise this money, just know that the driving force of your company will be to reach an exit (acquisition or IPO) in 5-7 years. If this is not what you're looking for then find another way to get where you're going.

Timing of raising money

A word of warning on the timing of raising money. If we had a nickel for every time we heard someone trying to raise money before they had actually done anything worth investing in we would be sitting on a yacht off the coast of Monaco right now. The idea that you need money to get started has somehow infiltrated the minds of many would-be entrepreneurs and it's just plain wrong in almost every instance. So please, just GET STARTED! When you've got something really interesting going on investors will start to find you. We really like Guy Kawasaki's take on this in his book The Art of the Start...it's definitely worth a read.

If you've done that and you think you're ready to raise some money then here are some thoughts that may be helpful.

If you don't know what you'll do with the money you raise, then proceed with caution. What do you really need it for? With very rare exceptions raising money should be tied to some easily definable technology, market, or growth milestones. That being said, it's always better to have more money than less and if market conditions are really optimal for raising money, many successful entrepreneurs would tell you to raise it while the raising is good.

Frequently, especially in the software world, you'll know you're ready to raise money when your venture is bursting at the seams, and in order to satisfy the market you need to grow at a pace that you can hardly imagine. In these cases, a cash injections can provide the juice needed to meet the market demands. Also, when this is the case, you are really in the drivers seat when it comes to negotiating with potential investors.

How much to raise

There are a few schools of thought on this topic, but we subscribe to a pretty simple philosophy.

One of the worst things you can do is run out of money...so don't put yourself in that position. Raising money is a serious pain in the ass in most cases, and the last thing you want to do is force yourself down the path of raising money every six months. It's just too disruptive to the important things that you should be working on. So figure out what it will take to get yourself to the milestones you're aiming for and double it. Seriously. It always takes twice as long and is twice as costly as founders think in the beginning.